- A vendor may develop historical patterns of regularly providing all customers or certain kinds of customers with the services or unspecified upgrades/enhancements normally associated with PCS, or may anticipate doing so, even though there is no written or contractual obligation or the stipulated PCS term commences at some date after delivery. In those situations, an implied PCS arrangement exists that commences upon product delivery. For purposes of applying the guidance in this SOP, PCS includes a vendor's expected performance based on such patterns, even if performance is entirely at the vendor's discretion and not pursuant to a formal agreement.
Under 97-2, a specified upgrade right constitutes a separate element of the arrangement whereas an unspecified upgrade right is part of PCS. Distinguishing between a specified and unspecified upgrade right requires an evaluation of all the relevent facts and circumstances to determine whether the vendor has made a commitment to provide specific funtionalities to the customer at some point in the future (regardless of whether or not the future date is specified). For example, some vendors of payroll software state in their license or PCS agreement that they will update the software as necessary for changes in payroll tax laws. Additionally, other software vendors commit to maintain compliance with a specified platform as part of their license of PCS agreements. In these instances, changes in payroll tax laws and changes to a specified platform are outside the control of both the vendor an customer and may be infrequent or nonexistent during the PCS term, so the upgrade rights are implicitly offered on a when-and-if-available basis. Accordingly, we believe that such a commitments to update software for changes in regulations or to maintain compliance with platform would be considered an unspecified upgrade right and would be deemed part of PCS.
Example - ABC Corp. is a provider of clinical software used by physician practices. ABC and its customers are subject to the requirements of the Health Insurance Portability and Accountability Act of 1996 (HIPPA), existing HIPPA standards are subject to change and new HIPPA standards may be released in the future.
Changes in HIPPA regulations are outside the control of ABC, and may be infrequent or nonexistent during the term of the PCS arrangement, so the updates are considered to be offered on a when-and-if-available basis. Also, the development effort for such updates would typically not be significant in comparison to the original development effort for the software, and updates for changes in HIPAA regulations would otherwise need to be made for ABC to continue its product offering in the marketplace. As such, the commitment to keep the software compliant with HIPAA regulations would be deemed to be an unspecified upgrade right (i.e., part of the PCS arrangement).
